New Rules of Engagement for IMF Loans
| Author | Camilla Andersen |
| Position | IMF Survey online |
As part of a wide-ranging reform of its lending practices announced in March, the IMF has redefined the way it engages with countries on issues related to structural reform of the economy.
The IMF's intention is to do away with procedures that have hampered dialogue with some countries, and prevented other countries from seeking financial assistance because of the perceived stigma in some regions of the world of being involved with the Fund.
Structural reforms refer to changes in the underlying makeup of an economy, such as fiscal systems, social safety nets, and measures to improve competitiveness and strengthen the financial sector.
"We arrived at these reforms by listening to our membership, consulting with a variety of stakeholders, and reviewing past experiences," John Lipsky, the IMF's First Deputy Managing Director, said. "These reforms will pave the way for countries to work more effectively with the Fund on crisis prevention and crisis resolution."
As part of its lending reform package, the IMF also announced the creation of a flexible credit line (FCL), a type of insurance policy for strong performers, mainly emerging market countries. Access to the FCL is restricted to countries that meet strict qualification criteria. But once a credit line has been approved, a country can draw on it without having to meet specified policy goals, as is normally the case for IMF loans. Mexico has applied for a $47 billion precautionary credit line under the FCL.
When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid in the first place. These loan requirements are known in IMF jargon as "conditionality." In most Fund programs, the loan money is paid out in tranches that depend on the country implementing the requirements set out in the loan according to a specific timetable.
A country's progress in implementing the loan conditionality is monitored through reviews carried out by the IMF's Executive Board. There are two types of conditionality:
* macroeconomic conditions, which may include criteria for containing inflation, reducing budget deficits and public debt, or strengthening the central bank's reserves, and
* structural conditions, which may include measures to strengthen banking supervision, reform the tax system...
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